Merchant Maverick https://www.merchantmaverick.com Thu, 20 Jan 2022 23:28:56 +0000 en-US hourly 1 https://wordpress.org/?v=5.8.3 What To Do When A Client Doesn’t Pay https://www.merchantmaverick.com/what-if-client-doesnt-pay/ https://www.merchantmaverick.com/what-if-client-doesnt-pay/#respond Thu, 20 Jan 2022 21:52:37 +0000 https://www.merchantmaverick.com/?p=135101 With the US’s debt collection industry accruing an annual revenue of about $13.4 billion, it’s safe to say that non-paying customers are a fairly common occurrence in the business realm. However, before you send your customer accounts to collections and wash your hands of the matter, make sure you have exhausted all viable means of contact and collection with the customer.

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You’ve provided services or sold your products in good faith, sent out invoices, and waited patiently, only to end up frustrated and dealing with a client who won’t pay their outstanding debt. Frustration aside, it’s important to know exactly what to do when a client doesn’t pay, so you can increase your chances of getting paid what’s owed.

With the US’s debt collection industry accruing an annual revenue of about $13.4 billion, it’s safe to say that non-paying customers are a fairly common occurrence in the business realm. However, before you send your customer accounts to collections and wash your hands of the matter, make sure you have exhausted all viable means of contact and collection with the customer.

This guide is going to break down the different strategies for resolving unpaid debts. Let’s help get you paid.

5 Strategies To Try If A Client Doesn’t Pay

Fortunately, there are many ways to encourage a client to cover their debts to your business. From sending updated invoices with late fees tacked on to completing a service termination, here are some effective strategies designed to help your business recover unpaid debts.

1. Make Multiple Attempts To Contact Your Client

There may be some legitimate reasons why a client is not be responding to your attempts to contact them. Your client may have lost access to their email account or changed phone providers. Your messages could have been filtered to spam. That said, some clients could be purposely dodging your attempts to contact them to avoid being held accountable for their debts. Regardless of why your messages aren’t being answered, directly contacting your client about their unpaid invoices is the first step to recovering your lost income or revenue.

Once the payment grace period has ended and your clients are firmly in the “late payment” range, send personalized follow-ups via multiple channels. Start with a single message to their preferred contact method warning them of their late payment and any penalties they may incur. Specify the time left to get their debts paid and/or get in contact with you to discuss payment options. If you have not gotten a client response via traditional contact channels, move on to messages across different channels, including phone calls, emails, and social media messages. Consider the latter option a last resort, especially if you will be contacting a private social media account.

Never allow a conversation about unpaid debts devolve into an argument with name-calling, foul words, or anything you would regret having associated with your business.

Yes, you may be frustrated with a lack of payment or communication. However, keeping your frustration at bay, even amidst attacks or denial from your client, will help you avoid tarnishing your business’s reputation. All it takes is one negative review with supporting images of you blowing a fuse to lose revenue and customers, and irreparably damage your business’s reputation.

Finally, it’s important to keep records of these collection attempts. If you call and leave a voicemail, follow up with an email reiterating the terms of the voicemail or phone call. Depending on how far the issue goes, you may need to present evidence that you repeatedly tried to get the debt collected.

2. Discuss A Payment Installment Plan

To establish an installment plan, you must be able to contact the client directly and the client must be willing to sign an installment plan agreement. This kind of communication with clients is a sign of good faith on their end, especially if they are the ones who initiate contact. These clients have a desire to settle their debt, unlike those ducking your calls at every opportunity. After discussing the reason behind your client’s late payment, usually in the realm of financial hardship or unexpected emergencies, you can discuss installment plan payment options that work for your business and the customer.

Keep in mind that you have already held up your end of the bargain by providing services or products, and now you’re putting in the effort to work with your customer to resolve their debt. So, while it’s important to hear your customer out, don’t allow installment plans agreements to become a negotiation. Look at the debt from a business perspective and evaluate how much of the debt your business needs and by when. Let that information guide the installment plan agreement terms. For example, if a client has racked up a $6,000 debt and your business needs at least $2,000 of that debt each month, you may choose to set the installment agreement plan at $2,000 by the 28th of each month for three months.

If your client defaults on the installment plan agreement, be sure that there are terms that will help you recover the money you lost in another way. For example, you may include a clause that renders the initial installment plan agreement null and void in the event of a missed payment. You may also include a missed payment clause that tacks on an interest charge to the remaining debt.

3. Charge A Late Fee

Late payment fees serve the dual purpose of encouraging clients to pay their debts on time and softening the financial blow your business may experience as a result of late-paying customers. That’s why it’s strongly recommended that you include a late payment fee clause in your business’s client contract. If you fail to draw up a signed contract that requires your client to pay late fees, there’s a good chance that your client won’t be obligated to pay them if the matter is taken to court.

Here’s a look at a sample late payment fee clause to include in your contract with the client and your business invoices.

“[Your Business Name] reserves the right to impose a late payment fee of [$$$] if payment is received more than [late payment grace period] after the invoice payment is due. The late payment fee will be imposed [how often the late payment fee will be imposed].”

If your business has reserved the right to impose late payment fees, whether through a business contract or within its invoice terms, now is the time to use it. Start by sending out a warning during the late payment grace period letting the client know that you will be charging a late fee after the grace period has ended. If the client has not gotten in touch with your business or paid their debt at the end of the grace period, send along an updated invoice that includes a late payment fee.

There’s a good chance that your customer may be inclined to get the late fee removed by paying some or all of their debt. This tactic is especially useful if you have a late fee that can be charged repeatedly until the debt is resolved. It’s rare that you’ll have to face a customer who will completely ignore a $300 debt running up to a $1,000 debt.

4. Cut Services

Cutting services is rarely the right first step when it comes to dealing with non-paying customers. However, cutting services is the right move if you have made multiple attempts to contact your client and have yet to get the debt resolved. After you’ve given them due notice of their debt, you should immediately notify your client that you will be discontinuing services due to non-payment. Then, cut the metaphorical cord. Don’t allow a non-paying client to continue to use your services or products for free.

5. Connect With Customer Support

Freelancers who are working on third-party platforms, like Upwork and Fiverr, do have some protection when it comes to clients who won’t pay their bills. Depending on the contract and client, Upwork offers a Payment Protection policy that protects payments to freelancers and agencies. Any disputes are handled by Upwork’s internal support with both freelancers and clients able to file disputes for review. Generally, if you have completed the work in compliance with the platform’s policy, your payments will come to you on both hourly and fixed-price contracts.

Fiverr’s seller protection system is a little different, but does offer some payment protection. If a client has paid you, but then disputes the transaction with their bank, the bank may issue a chargeback. The total amount of the chargeback will be deducted from your account. Fiverr’s Trust and Safety team will review the problem, but there’s no guarantee that the chargeback will be reversed.

Of course, not every dispute will go your way. However, if you are working with a reputable freelancer platform, there’s a good chance that you’ll have some support when dealing with clients who don’t pay.

6. Connect With Company Leadership

Depending on the size of the business you are working with, you may have the option to climb a little higher on the leadership ladder to resolve your debt issue. For example, if you have only been able to contact the company’s accounts receivable department to no avail, try to contact the business’s owner or CEO directly via email to explain the problem. You might find that communicating with the right person does wonders for getting problems solved.

What To Do When A Client Still Won’t Pay?

Unfortunately, there are cases when a client still won’t pay, even after you have exhausted all means of debt resolution. If less aggressive solutions have failed, it may be time to consider bringing in outside help or simply cutting your losses. Here’s a look at some of the options businesses have when pursuing unpaid client debt.

Invoice Factoring

Factoring is a short-term solution that can provide immediate cash flow for cash-strapped businesses. Factor financing allows a business to sell its accounts receivables to an invoice factoring company or financial provider. The factor pays the business a high percentage of the account’s value (think: $750,000 of a $1m debt). Once the factor collects the entire debt from the account, your business receives the remaining percentage of the debt minus commission and other fees. If you consider factoring for your business, understand that there are usually restrictions that include your business’s age, annual revenue, and much more that may reduce your chances of qualifying for factoring services.

Debt Collection Agency

A debt collection agency can help reduce losses by purchasing your business’s delinquent accounts or collecting the funds on your business’s behalf and charging fees for their services. With the latter service, your business will be paid after the debt (or a portion of it) has been collected. Debt collection agencies are viable options for larger businesses with many delinquent accounts that can be sold in large batches or collected over time.

Small Claims Court

Small claims court is an option for businesses that have exhausted all other avenues of debt collection and want legal aid in settling the debt. There are restrictions that pertain to which cases you can bring to small claims court and whether your business will be permitted to retain legal counsel. For example, New York City’s small claims court limits suits to claims of $5,000 or less. So, if a customer owes more than that, you’ll need to take your legal action further up the chain. Additionally, your business may or may not be allowed to lawyer up in a small claims court suit depending on your local laws, so review your local laws before choosing this route.

Bad Debt Write Off

A bad debt write-off may feel like giving up, but sometimes it’s worth it to cut your losses. If a client won’t pay and you don’t want to waste any more valuable time or resources to pursue the debt, you can write it off. The process of writing off a bad debt consists of its removal from your company’s asset line and being transitioned to an expense for the company. In short, it comes out of your business’s coffers.

How To Take Legal Action For Non-Paying Clients

Pursuing legal action against a client who has not paid is an option worth considering if you have already made significant attempts to collect the debt without legal intervention and you are confident that your client will pay up if you win your suit.

Unfortunately, even if you win your case against a non-paying customer, they may not pay you voluntarily. The client may not have the funds or assets to cover their debt or they may have hidden their assets in an attempt to dodge court-ordered wage garnishments or asset seizure. Either way, you’ll need to gauge whether a legal judgment will actually land you money if you win.

When you go the legal route, you’ll be dedicating time and money to the collection of the debt; you’ll have to decide whether those are resources you are willing to dedicate even with the possibility of not being paid after winning.

Suing A Client For Non-Payment

If you choose to take legal action against a non-paying client, start by researching your state and local laws regarding claims suits. If your state allows you to retain counsel in small claims court, you should also vet lawyers in the area before settling on one to represent your business.

If suing a client for non-payment, business owners should start by filing a statement of claim or complaint with the appropriate court branch in their county. When filing a statement, you will need to provide the following relevant information:

  • Names of those involved
  • Addresses for those involved
  • The amount you are seeking
  • General facts about the case

You may also need to pay a fee to file your claim. Once you have submitted the complaint, the court will move forward with the suit, serving your client/defendant with a summons or notice that they are being sued. A hearing date will be scheduled, and your case will be heard.

The process for suing a client for nonpayment may vary slightly based on your location within the US.

Once your client has been notified of the legal suit against them, they may be inclined to settle out of court. If that’s the case, you need to have any new payment agreement in writing and should consider having an attorney present at signing.

If you win the case, your client is legally required to pay you, except in cases when they can’t. Take note of the payment guidelines set by the court after you have won your case. If a client does not pay by the date (or dates, if an installment plan is ordered) set by the court, you may have grounds to pursue further legal action, including wage garnishments to ensure payment.

How To Write Off Bad Debt For Outstanding Invoices

Writing off bad debt is essentially telling the IRS that you weren’t paid, don’t expect to be, and would like the unpaid debt to be deducted from your business’s reported income. Bad debt write-offs are a viable solution for businesses that are doubtful about their ability to collect on a bad debt, even with legal intervention.

At the tax year’s end, bad debt for sole proprietorships should be reported on IRS Schedule C Form 1040, Line 48 on your business’s tax return. For partnership businesses, bad debt should be filed on Form 1065. If you will be reporting bad debt on your business taxes, you’ll need to prove that the loan was not considered a gift at the time of the exchange.

Writing off bad debt for outstanding invoices can only be done if your business uses accrual basis accounting. Unfortunately, a business cannot write off bad debt if it uses cash basis accounting.

If you’re unsure about the difference between cash- and accrual-based accounting, check out our post: Cash Basis VS Accrual Basis Accounting: What’s Better? for more information or to give a formal name to the system your business uses.

Tracking Bad Debt For Your Business

When reporting bad debt to the IRS, businesses generally use the direct write-off method in which debt that can’t be collected is written off as an expense at the end of the tax year. However, the direct write-off strategy doesn’t work well for business accounting, as unpaid debt represents lost income that impacts a business’s bottom line pretty immediately. For example, if a bad debt is considered uncollectible by March, waiting until the end of the year to internally mark it as uncollectible is not only inefficient, but it can lead to income overstatement.

That’s why businesses use the allowance method to track debt internally. Using the allowance method, businesses can match bad debt to their transactions in the accounting period in which they occur and estimate lost revenue related to bad debt on an ongoing basis. The estimated figure is used to balance an allowance account that is adjusted based on bad debts recorded during the accounting period. So, if a bad debt of $1,000 is expected (but not yet recorded), that amount would be debited by the company and credited to the allowance account.

The whole process is akin to building a savings account to fund an expected expense that’s highly variable, like an annual medical expenses budget line item. You may expect to pay a $2,500 premium for your plan, but a single unexpected ambulance ride and emergency room visit can cause that cost to skyrocket. So, it’s best for your wallet to overestimate expected expenses.

The Bottom Line On Clients Who Don’t Pay

While dealing with non-paying customers is a relatively common business experience, it’s not exactly a welcome one. Collecting unpaid client debts can seem like a herculean task that requires massive amounts of effort and time. That’s why the absolute best method of handling unpaid client debts is to avoid them. That’s right. Be proactive and implement business procedures that reduce the chances that a client will stiff you.

Here are some ways to avoid unpaid invoices in the future.

  • Vet prospective clients
  • Collect payment beforehand
  • Require signed business contracts
  • Send invoices quickly
  • Set payment terms upfront
  • Review accounts receivable aging reports

You have to spend money to make money, sure. However, when it comes to unpaid client debts, it’s more like ‘you have to lose money to make money.’ So, be proactive with collecting payments, avoid chasing late payments, and know when to let debts go. Do this, and you’ll save yourself a lot of headaches in the future.

Want more advice to help you get your invoices paid? Check out our post: Slow-Paying Customers? 10 Tips To Get Your Invoices Paid Faster for helpful tips to help you encourage quick payments from your clients.

FAQs On Non-Paying Clients

What can you do if a client doesn't pay?

Fortunately, for business there are many strategies to use to recover unpaid client debt from handing their account to collections to taking them to small claims court. However, the first step to getting a client to pay is to get in touch with your client directly.

From there, you may be able to come up with a payment plan. If you are unable to contact your client directly, you may need to impose late payment fees, cut services, or pursue legal action against them.

How do you write off unpaid invoices as bad debt?

To write off unpaid invoices as bad debt, your business will need to file Form 1040 with the IRS and report unpaid invoices under ‘Other Expenses’ on line 48. If your business is a partnership, you’ll need to file Form 1065 to report unpaid debt.

Can I take legal action for clients that don't pay?

You can take legal action against clients who don’t pay; however, there is still a strong chance that you will not recover the debt even after a court win.

If you choose to take legal action against a non-paying client, you’ll need to file a statement of claim with the proper small claims court or pursue a formal lawsuit against your client depending on the size of the debt.

How to encourage clients to pay invoices on time?

Being proactive is the best way to encourage clients to pay invoices on time. Let clients know when invoices are due as early on as possible and send multiple reminders to keep them updated. Whenever possible, collect payment for services and products beforehand to avoid payment issues. Additionally, using invoicing software can make it easier for clients to pay by providing payment portals and automating invoicing tasks for your business.

How do you write off bad debt in QuickBooks?

To write off bad debt in QuickBooks, start by creating an expense account for your business’s bad debts. After creating your ‘bad debts’ expense account, create a non-inventory item to act as a placeholder for bad debts. Credit the bad debt item to your ‘bad debts’ expense account by creating a credit memo for the amount you want to write off. After applying the credit memo to the correct customer invoice (ie. the customer who the bad debt came from), the debt should be recorded on your QuickBooks Profit and Loss statement as a bad debt.

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The Best Accounting Software For Tax Support https://www.merchantmaverick.com/best-accounting-software-programs-for-tax-support/ https://www.merchantmaverick.com/best-accounting-software-programs-for-tax-support/#comments Mon, 17 Jan 2022 17:30:54 +0000 https://www.merchantmaverick.com/?p=28908 Dreading tax season? These 3 accounting programs can help you handle your business taxes with ease and file the correct forms on time.

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Tax Support

In the midst of the holiday cheer, it’s easy to forget about the inevitable Scrooge lurking around the corner. That’s right, tax season is about to sneak up on us again.

Before you start hyperventilating, take a deep breath. Don’t let 1099-MISCs, W-2s, and Schedule Cs scare you. As stressful as tax time can be, accounting software is there to help. Accounting software can assist you in preparing and filing a variety of tax forms so you can concentrate on running the business you love.

Here at Merchant Maverick, we searched for the top three best accounting software systems for tax support and have come up with a few fantastic options to fit your business needs. The average program can handle 1099s, but we searched for accounting software that goes the extra mile. To truly get your money’s worth during tax season, check out one or all of the following three accounting vendors.

QuickBooks Pro

Accounting Software Taxes

I’m sure you aren’t surprised to see a QuickBooks product on this list. When the rubber meets the road, you really can’t beat the features of QuickBooks Pro — especially not when it comes to tax support. QuickBooks Pro is a full-featured, locally-installed software that is loved by small businesses and accountants alike.

QuickBooks Pro supports the following tax forms:

  • 1099-MISCs
  • W-2s
  • W-3s
  • 1096s
  • 940s
  • 941s
  • 944s

QuickBooks Pro has the largest selection of supported tax forms around, by far. Considering that most basic accounting software programs only support 1099’s, the variety offered here can be a huge advantage.

Something that sets QuickBooks Pro even further apart is that the software allows you to buy and print your tax forms directly from the Intuit website. You can also e-file your 1099-MISCs if you have either the Pro Payroll Enhanced plan or the Full-Service Payroll plan. With built-in e-filing and e-pay options, QuickBooks Pro makes tax season as easy as can be.

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To learn more about QuickBooks Pro, check out our full review and see why we gave this software 5/5 stars.

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One of the best accounting software options out there for small businesses

QuickBooks Self-EmployedTax Support

QuickBooks Self-Employed is a tax tool that can be used for minor bookkeeping and federal tax filing. Unlike QuickBooks Pro, QuickBooks Self-Employed is designed with the freelancer in mind. Freelancers have very specific tax guidelines and distinct tax and accounting needs.

QuickBooks Self-Employed offers the following tax support options:

  • Estimated quarterly taxes
  • Deductions
  • Schedule C

A particularly challenging aspect of being a freelancer is calculating estimated quarterly taxes, so this is arguably one of the most useful features of QuickBooks Self-Employed. The software also helps freelancers take advantage of all possible deductions, including mileage, travel, meals and entertainment, and home office space.

Based on how you categorize your transactions, the software generates a Schedule C. The best part about QuickBooks Self-Employed is that you get free Turbo Tax filing with your subscription (if you purchase the $17/mo plan). Just take your Schedule C, file online, and voila! Taxes are in the bag. You’ll also save some money by purchasing QuickBooks Self-Employed with Turbo Tax rather than just paying the $109 fee for filing with Turbo Tax as a freelancer.

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Much like Xero, QuickBooks Self-Employed provides great resources for understanding and optimizing your work as a freelancer. Check out this Complete Guide to Taxes for the Self-Employed and more.

While QB Self-Employed is a great tax tool, it is important to remember that this software is limited and a bit deceptive. There is no state tax support, so (by definition) you won’t be able to complete all your tax obligations with QuickBooks Self-Employed. You will be able to take care of your federal taxes and organize your accounts, which, for some people, may be all that is needed.

Before making a commitment to QuickBooks Self-Employed, read our full review so you can be sure to understand why it’s only rated at 3/5 stars. You can also check out the QuickBooks Self-Employed website for more details.

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A great choice for freelancers needing some extra help managing their business

Sage 50c

Once called Peachtree, Sage 50cloud is one of the other big names in accounting. Despite the name’s implications, Sage 50cloud is locally-installed software with a cloud-based storage component. The software, although quite expensive, is chock-full of features and can support up to 40 users. The software boasts strong accounting and is highly customizable.

Sage 50cloud support the following tax forms:

Best Tax Accounting Software

  • 1099s
  • w-2s
  • w-3s

Next to QuickBooks Pro, Sage 50cloud has one of the biggest tax support offerings on the market. The software also has a unique Year-End Wizard feature that walks you through how to close your books, so you can be ready to file your taxes correctly.

While we admire these aspects of Sage 50cloud, the software is not without its faults — mainly the price. Sage 50cloud is very expensive compared to other accounting software programs, which is why we recommend it to established medium or large businesses that need Sage’s comprehensive features, customizability, and traditional accounting. The software also has a steep learning curve and the UI is outdated. But these downsides don’t negate the software’s great tax support options.

Before purchasing Sage 50cloud, read our full Sage 50cloud review to learn more about the software, and compare Sage’s tax offerings to other cloud-based options to ensure you’re making the right decision.

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An accounting option with an advanced feature set and strong reputation

Final Thoughts

What Information to Bring Accountant for Small Business Taxes

Don’t let taxes scare you any longer. Using any of these three options, you can file your taxes with ease and confidence, knowing that you will survive another year — hopefully with much less stress and fear.

To summarize:

QuickBooks Pro is a great option for business owners with small to large businesses who need full-fledged accounting software as well as 1099, W-2, W-3, and or 1096 support. You’ll get ample features, but be prepared for a steep learning curve; getting accustomed to this software requires some patience and time.

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For the freelancers and the self-employed, QuickBooks Self-Employed is the way to go. You can’t file state taxes, but you do get estimated quarterly tax support, deduction support, and a Schedule C. The Turbo Tax integration in and of itself is almost reason enough to make use of this tax tool.

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Sage 50cloud is ideal for medium to large businesses needing to file 1099s, W-2s, or W-3s. The software is expensive and has a steep learning curve, but you’ll get ample feature strong accounting, and incredible customizability.

If you aren’t already using any of these accounting software programs, maybe it’s time to switch. Switching accounting software in the middle of tax season might cause unnecessary hassle unless you feel up to the challenge. So instead, get a leg up for next tax season and start using one of these accounting software options for your 2019 accounting.

But these aren’t the only options worth mentioning. QuickBooks Online supports 1099s and W-2s, FreshBooks support 1099s, and Wave supports W-2s, W-3s, 940s, and 941s for certain states. All of these choices could be a good fit for you depending on your business’s needs. Read our comprehensive accounting software reviews to learn more about each option.

FreshBooks



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With the right accounting software, you can survive another tax season! Good luck, and happy filing!

For more tax advice, view some of our other tax help articles.

What Can I Write Off As A Small Business Tax Deduction?

2018 Tax Prep Checklist

How Your Business Accounting Software Can Help You File 2018 Taxes

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The Best Accounting Software For Freelancers https://www.merchantmaverick.com/best-accounting-software-for-freelancers/ https://www.merchantmaverick.com/best-accounting-software-for-freelancers/#comments Mon, 17 Jan 2022 17:00:54 +0000 https://www.merchantmaverick.com/?p=53387 A round up the top accounting software for freelancers and great freelance tools that you should know about to help your business succeed, including everything from email marketing software to website builders to mobile payment apps and more.

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Best Freelance Accounting Software

There are over 55 million freelancers in the US. With perks like being your own boss, setting your own schedule, and the flexibility to work from anywhere, it’s easy to see why freelancing is becoming such a popular choice. Whether you are self-employed full-time or are freelancing on the side to earn some extra income, there are key software tools that can help you run a more effective and profitable business — the most important being accounting software.

As a freelancer, it’s easy to focus on growing your business, finding new clients, creating marketing campaigns — anything but accounting. However, having a strong accounting process and being in control of your business’s finances is the key to running a successful business.

Luckily, there are plenty of easy to use, affordable accounting solutions that will help you manage your freelance finances and taxes quickly so you can get back to doing what you love.

In this post, we’ll share the top accounting software for freelancers. We’ll also share some other great freelance tools that you should know about to help your business succeed, including everything from email marketing software to website builders to mobile payment apps and more. We’ve spent hours researching and testing software so that you can find the perfect software solutions to run your freelance business.

headingQuickBooks Self-EmployedAND COWave

Best Accounting Software for Freelancers

Best Accounting Software for Freelancers

Best Accounting Software for Freelancers

ReviewCompare

ReviewCompare

ReviewCompare

Pricing

$10 - $17/month

$0 - $18/month

$0/month

Size of Business

Self-Employed

Self-Employed

Small

Ease of Use

Very Easy

Very Easy

Very Easy

Customer Service

Fair

Very good

Poor

Number of Users

1

1

1

Number of Integrations

4

10

4

Cloud-Based or Installed

Cloud-Based

Cloud-Based

Cloud-Based

Mobile Apps

iOS & Android

iOS & Android

iOS & Android

Characteristics Of Good Freelance Accounting Software

In terms of accounting software, freelancers have very specific needs. Most traditional small business accounting software simply won’t fit the bill. Freelancers need an easy-to-use financial management solution designed specifically for the self-employed. Here are some of the key characteristics a good freelance accounting software should have:

  • Affordable: For freelancers, every penny counts. With a slim or nonexistent accounting budget, freelancers need a solution that is free or offers affordable, low monthly payments.
  • Easy To Use: Good accounting software should be easy to use as most freelancers don’t have time to spend hours balancing the books. Many also may have little to no previous accounting experience so they need something that is easy to learn and understand.
  • Time-Saving Automations: All accounting software should feature automations, but freelancers are in particular need of any way to save time. Standard automations include automatic receipt uploading, mileage tracking, and live bank feeds.
  • Manage Personal & Business Finances: While freelancers should open a separate business banking account to safeguard against tax audits, this simply isn’t the reality for many self-employed individuals. Because of this, many freelancers need to be able to separate their personal expenses from their business expenses using their accounting software
  • Good Organization: As a freelancer, it’s easy to put finances on the back burner, but knowing your exact income and expenses is key to running a successful business. Accounting software should help you stay organized, run key financial statements, and make more informed business decisions.
  • Tax Support: With estimated quarterly taxes and ever-changing deductions, freelance taxes can be overwhelming. The best freelance accounting software will include tax support to help you manage your self-employed taxes.
  • Support Resources: Good accounting software will also provide you with ample learning materials to help you better your business.

We weighed all of these factors when selecting the best accounting software for freelancers. Each of the top three accounting options displays many, if not all, of the features listed above to help make managing your freelance finances as simple as possible.

1. QuickBooks Self-Employed

Best Accounting Software for Freelancers

Best overall freelance accounting and tax support. Ideal for filing directly with Turbo Tax.

Created in 2014, QuickBooks Self-Employed was designed specifically to help freelancers manage their finances and file their taxes easily. QuickBooks Self-Employed is incredibly easy to use, offers great mobile apps, and has the best tax support of all three programs on this list. The software helps you calculate your estimated quarterly taxes, track your mileage, find other deductions like the home office deduction, and even has a Turbo Tax integration for easy filing. On top of tax support, QBSE also helps freelancers keep track of their income and expenses.

The software is ideal for freelancers looking for tax support, a way to separate personal and business expenses, and basic expense tracking.

ProsCons

Suited for freelancers

Limited invoice features

Calculates estimated quarterly taxes

No state tax support

Easy to use

Turbo Tax integration

Pricing

QuickBooks Self-Employed offers two pricing plans ranging from $10 – $17/month. The difference between the two is that the larger plan includes a built-in Turbo Tax integration and the ability to pay estimated quarterly taxes online.

Features

Best Freelance Accounting Software

QuickBooks Self-Employed supports a good amount of features, especially where taxes are concerned. Here’s an idea of what QuickBooks Self-Employed has to offer:

  • Track income and expenses
  • Separate personal and business expenses
  • Invoicing
  • Record tax deductions
  • Fixed asset management
  • Calculate estimated quarterly taxes

Ease Of Use

QuickBooks Self-Employed is incredibly easy to use. It has a modern, well-organized UI that takes very little time to learn and offers strong mobile apps that are also easy to navigate.

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A great choice for freelancers needing some extra help managing their business

Customer Support

QuickBooks Self-Employed’s customer support has its pros and cons. There’s no phone support, but there is a live chat feature if you want to get in touch with a representative directly. The good news is that QBSE provides a great selection of learning resources for freelancers including a comprehensive help center and a small business center chock full of business advice.

Takeaway

QuickBooks Self-Employed is one of the best accounting and tax support solutions out there for the self-employed. The software offers the most advanced level of tax support on the market, and while this isn’t a full-fledged accounting app, it allows freelancers to manage their income and expenses.

Read our full QuickBooks Self-Employed review to find out if this software is right for your business.

2. AND CO

Best Accounting Software for Freelancers

Best for freelancers looking for strong accounting, good customer support, and the ability to create and send contracts to clients.

Founded in 2015, AND CO is an up-and-coming freelance accounting software that was recently acquired by Fiverr, one of the leading freelance marketplaces. The software is easy to use, offers great customer support, and provides traditional accounting features like time tracking and project management. While the software does not offer tax support, it does have a one-of-a-kind contract feature that allows you to create legal contracts for projects that are compliant with the Freelancers Union. This allows you to dictate who retains rights to your work and accept signatures directly from clients.

AND CO is ideal for freelancers who don’t need the extra tax support of QuickBooks Self-Employed and would rather have more traditional accounting features, contracts, and better customer support.

ProsCons

Suited for freelancers

No tax support

Easy to use

Unsuited for product-based businesses

Good customer support

Limited integrations

Strong mobile apps

Pricing

AND CO has a free plan for freelancers with a single client and a paid plan which costs $18/month. The larger plan includes unlimited reports and more advanced proposals and contracts.

Features

Best Accounting Software for Freelancers

While AND CO may be lacking in tax support, the software has a lot of great features going for it. Here are some of the features AND CO has to offer:

  • Invoicing
  • Contact management
  • Expense tracking
  • Time tracking
  • Project management
  • Proposals
  • Contracts
  • Subscriptions

Ease Of Use

AND CO is incredibly easy to use. The software was originally designed solely as an iPhone app so the mobile apps are also easy to navigate.

Customer Support

AND CO offers great customer support. Representatives are generally kind and quick to respond to questions. The company also offers great business tools and support resources for freelancers, as well as all of Fiverr’s extensive freelance resources.

Takeaway

AND CO is a great accounting and finance management tool for freelancers. The main drawback is that there is no tax support. However, you won’t find such developed proposal and contract features anywhere else.

Read our complete AND CO review to see if this freelance tool is right for you.

3. Wave

Best Freelance Accounting Software

Best for freelancers looking for a complete accounting solution for free.

Wave is a free accounting software solution that offers an incredible number of features for $0/month. While the software wasn’t designed specifically for freelancers like QuickBooks Self-Employed and AND CO, Wave is one of the best accounting programs to fit the needs of freelancers. It’s affordable, easy to use, and allows business owners to separate personal and business accounting.

The software is ideal for self-employed individuals looking for a full accounting solution or those who need an affordable way to manage their freelance finances.

ProsCons

Free

Limited integrations

Easy to use

Poor customer support

Good feature set

Limited mobile apps

Positive customer reviews

Pricing

Wave only offers one accounting package and it’s completely free. There are no user limits or feature limits. You get all of the great features of Wave for $0/month. The only extra costs are payment processing, payroll, and professional bookkeeping services.

Features

Best Accounting Software for Freelancers

Of all three options on this list, Wave offers the most features. While you won’t find tax support, Wave does offer strong accounting and is full-fledged accounting software. Because of Wave is actual accounting software, it’s the only program on this list that will allow you to actually balance the books. Here are the features you’ll find with Wave:

  • Invoicing
  • Estimates
  • Contact management
  • Expense tracking
  • Accounts payable
  • Inventory
  • Reports

Ease Of Use

Wave is well-organized and its modern UI is easy to navigate.

Customer Support

Wave offers many great support resources; however, getting in touch with an actual representative is difficult. There is no phone support and response times are slow.

Takeaway

Wave is an affordable accounting program that gives you strong accounting and tons of features without breaking the bank. The software does not offer tax support, but it does offer payroll, making it a scalable solution if you plan on growing your freelancing business. The professional bookkeeping services are also great for freelancers who aren’t comfortable doing their own accounting or simply don’t have the time.

Read our full Wave Accounting review to see if this software is right for you.

Other Great Freelance Tools

Your freelancing business is your baby, and as it takes a village to raise a child, it can also take an army of integrations to run a business. There are tons of great freelancing tools that can help you manage and grow specific areas of your business, like email marketing, invoicing, eCommerce, and more. Here are some of the top freelance software tools we recommend.

The Best Invoicing Software For Freelancers

If your freelance business relies heavily on invoicing and isn’t quite ready for all of the other features included with accounting software, invoicing software could be a simpler alternative to meet your business needs.

Zoho Invoice

 

Zoho Invoice is an easy to use, cloud-based invoicing program with incredible invoicing features. With over 15 invoice templates to choose from and international invoicing options, Zoho Invoice has a lot to offer. Read our complete Zoho Invoice review to learn everything this software is capable of.

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Invoicera

Invoicera is also a could-based program with a good feature set and attractive invoice templates. A forever free plan and over 35 payment gateway integrations are just a few of the perks of this invoicing option. Read our complete Invoicera review to learn if this software is right for you.

Visit our invoicing software reviews for more options or compare our top favorite invoicing solutions for small businesses.

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A full-featured invoicing solution with ample invoicing customizations, beautiful templates and a practical client portal

The Best Receipt Management Software For Freelancers

Business owners are all too familiar with the dreaded receipt shoebox. Receipt management software or expense tracking software can help freelancers get organized and handle reimbursements with ease.

Expensify

Expensify is a cloud-based expense management solution with mobile receipt scanning, expense approval workflows, and next-day expense reimbursements. The software also integrates with key accounting programs for a seamless expense tracking experience.

Shoeboxed

Shoeboxed is also a cloud-based expense management solution with receipt scanning, mileage tracking, expense reports, basic CRM, and even tax prep. Shoeboxed also integrates with key accounting programs.

The Best Payment Processing Software For Freelancers

Need to accept mobile payments from your customers? Mobile payment apps allow freelancers to accept payments anywhere — whether that be at a home show, a small storefront, or even a client meeting at Starbucks. If your freelance business could benefit from accepting payments on the go, mobile payment processing is a must.

Square

Square is one of the most popular mobile payment apps. It offers affordable flat rate pricing and free tools for selling online, making it easy to accept payments from your customers in multiple ways. Read our complete Square review to learn how Square could benefit your business.

Take a look at our other mobile payment processing reviews or compare our top five payment processing solutions for businesses.

Best Overall Mobile POS


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Highlights

Retail POS: Free trial ($60/mo value)

 

Restaurant POS: Free trial ($60/mo value)

 

Square POS: Always free

The Best Website Builders For Freelancers

A website is key for many freelancers who sell goods online or who need a professional online portfolio to showcase their work to clients. Luckily, there are plenty of affordable, easy to use website builders that can give your freelance business the edge.

Wix

Wix is an easy to use website builder that is ideal for eCommerce and blogging. Wix offers a compelling free version with unlimited pages and hundreds of customizable templates to choose from. Read our complete Wix review to learn more about this affordable website solution.

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Squarespace

Squarespace is a website builder that is perfect for eCommerce and blogs While there’s no free plan, the software offers amazing templates with a huge degree of customizability. Read our complete Squarespace review to see if this website builder is right for you.

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Read our other website builder reviews and eCommerce reviews to find the perfect solution for your business.

The Best Email Marketing Software For Freelancers

One of the most challenging parts of freelancing is finding clients. Email marketing software can be a great way to market your services and target clients so you can grow your business.

MailChimp

MailChimp is an easy to use email marketing software with affordable payments. The software offers email campaigns, email automations, and even analytics and reporting. Read our complete MailChimp review to learn how this software could help your business.

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Benchmark

Benchmark is another great email marketing option that is easy to use and offers good customer support. The software has hundreds of templates to choose from and the unique ability to send video emails and online surveys. Read our complete Benchmark review to see if this software is right for your business.

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Read our other email marketing software reviews or compare the best email marketing solutions to find the right option for your business.

Picking The Perfect Freelance Accounting Software

Choosing Accounting Software

Running a freelance business can be difficult, but with the right tools, you can set your business up for success. With accounting solutions like QuickBooks Self-Employed, AND CO, and Wave, you can manage your finances and gain valuable insight into your business’s income and expenses.

QuickBooks Self-Employed is ideal for freelancers in need of tax support; AND CO is ideal for legal, professional contracts; and Wave is ideal for the complete accounting package. Identifying your freelance needs and examining your current financial process can help you decide which program is the perfect fit for your business.

Then ask yourself, what other tools could benefit my business?

Email marketing software could help you grow your clientele. A website builder could help you create a professional brand. A payment processing app could help you increase your sales. Here at Merchant Maverick, our goal is to help you find the best software to help your business succeed. We have hundreds of reviews across multiple software industries so you can find the perfect software combo. Check out our comprehensive reviews and our other freelance resources as well.

Top 10 Tax Deductions For Freelancers

Loans For Freelance Businesses: Your 13 Best Options

headingQuickBooks Self-EmployedAND COWave

Best Accounting Software for Freelancers

Best Accounting Software for Freelancers

Best Accounting Software for Freelancers

ReviewCompare

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Pricing

$10 - $17/month

$0 - $18/month

$0/month

Size of Business

Self-Employed

Self-Employed

Small

Ease of Use

Very Easy

Very Easy

Very Easy

Customer Service

Fair

Very good

Poor

Number of Users

1

1

1

Number of Integrations

4

10

4

Cloud-Based or Installed

Cloud-Based

Cloud-Based

Cloud-Based

Mobile Apps

iOS & Android

iOS & Android

iOS & Android

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6 Best POS Systems In Canada For 2022 https://www.merchantmaverick.com/best-canadian-pos-system/ https://www.merchantmaverick.com/best-canadian-pos-system/#respond Fri, 14 Jan 2022 20:25:09 +0000 https://www.merchantmaverick.com/?p=135126 Good Canadian POS systems have certain key attributes: transparent pricing, ease of use, integrated payment processing, and enough scalability to accommodate business growth. Read on to learn about some of the top POS systems in Canada.

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How Does The Mileage Tax Deduction Work? https://www.merchantmaverick.com/mileage-tax-deduction/ https://www.merchantmaverick.com/mileage-tax-deduction/#respond Mon, 10 Jan 2022 17:07:49 +0000 https://www.merchantmaverick.com/?p=134799 Whether you're a full-time small business owner or you do freelancing work on the side, doing your taxes can be stressful. One way to ease some of that tax-time stress is by lowering your tax liability with credits and deductions, such as the standard or actual expenses mileage deductions.

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mileage tax deduction

While it’s easy to avoid even thinking about tax time, proper preparation is key to maximizing your deductions and lowering your tax liability. One deduction that can save you hundreds — or more! — this tax season is the mileage tax deduction.

In this post, we’re going to break down this crucial deduction to help you determine if you qualify, how to accurately track your mileage, the two methods for calculating your deduction, and more. Keep reading to learn more and help ease the stress of the upcoming tax season.

What Is The Mileage Tax Deduction?

What is the mileage tax deduction, and how important is it to your business? The mileage tax deduction is a deduction you can claim on your tax return if you meet specific conditions and use a vehicle for business purposes.

If you drive a vehicle for business purposes (such as going from your office to an off-site meeting with a client), you can deduct your mileage from your income tax return. You may also qualify for a deduction for miles driven to medical appointments or to perform volunteer work.

How Does The Mileage Tax Deduction Work?

As you might expect, one of the biggest questions a business owner has if they travel a lot is, “How does the mileage tax deduction work?” Any self-employed taxpayer or small business owner knows the importance of deductions, and the mileage tax deduction is a big one. This holds especially true for taxpayers that drive long distances or travel to clients often for qualified business purposes.

The mileage tax deduction is calculated by multiplying qualified mileage by the annual rate set by the Internal Revenue Service. The standard IRS mileage rate for the 2021 tax year is $0.56/miles. For qualifying trips for medical appointments, the rate is $0.16/mile. For volunteer work, the rate is $0.14/mile. This rate changes each year, so make sure you’re using current rates if you opt for this deduction.

While this is the standard method of taking a mileage tax deduction, you may instead opt to use the actual expenses method. Instead of tracking mileage, you’ll be able to write off actual vehicle expenses associated with your business. We’ll dive more into both of these methods, so keep reading.

Do I Qualify For The Mileage Tax Deduction?

In years past, many employees could take advantage of the mileage tax deduction to lower their tax liability. However, the passage of the Tax Cuts and Job Acts of 2017 changed this for many people, making it so that only the self-employed and employees in specific industries could take advantage of this deduction.

You can claim the mileage tax deduction on your income tax return if one of the following conditions apply:

  • You own a small business
  • You’re self-employed and file a Schedule C or Schedule F
  • You’re an independent contractor
  • You drive for a rideshare service
  • You’re traveling for volunteer work
  • You’re traveling for medical appointments
  • You’re a qualified performing artist
  • You work as a fee-based government official
  • You’re a reservist in the armed forces
  • You’re an active-duty military member that has moving expenses associated with a permanent change of station

Additionally, you will also need to determine what counts as business mileage. The following mileage is deductible:

  • Travel from store, office, or another type of business location to other business-related locations (e.g., traveling to a client’s home or place of employment for business purposes)
  • Travel from your home to another business location if you work from a home office
  • For rideshare drivers, trips driven between your first business stop through the last stop

The following mileage is not deductible:

  • Travel from your home to your store, office, or other business location
  • For rideshare drivers, the trip from your home to your first stop and the trip from your last business stop to home

How To Track The Mileage Tax Deduction In 5 Steps

Taking the mileage tax deduction is just one of the ways that you can lower your tax liability. If you’ve never claimed this deduction before, get started here with these five easy steps for tracking and claiming the mileage tax deduction on your income tax return.

Step 1: Determine If You Qualify For The Mileage Tax Deduction

Before you claim the mileage tax deduction on your tax return, you must first determine if you qualify for this deduction. Mileage tax deductions can be claimed by small business owners, self-employed individuals, independent contractors (including rideshare drivers), reservists, qualified performing artists, certain government employees, and individuals that travel for volunteer work or medical appointments.

If you’re unsure if you qualify, talk to an accountant or tax professional about your specific situation.

Step 2: Choose A Method For Recording Your Mileage

There are several ways to track and record your mileage for tax purposes. A traditional mileage log, your accounting software, or even a smartphone app can be used to track your mileage throughout the year.

No matter which method you choose, make sure to record your vehicle’s odometer reading at the beginning and the end of the year. Additionally, make sure that you’re accurately tracking personal/business mileage and keeping your records updated.

Step 3: Document Your Mileage Or Expenses

Once you’ve determined how you’ll log your mileage, make sure that you keep your records up to date throughout the year. This ensures that you accurately calculate your mileage, easily differentiate between personal and business trips, and get the most out of the mileage deduction. You’ll also be glad you kept updated records in the event of an IRS tax audit.

In your mileage log, software, or app, record the following information for each trip:

  • Start/end odometer readings
  • Start/end location
  • Purpose of the trip
  • Total mileage for the trip

This method should be used if you plan to claim the standard mileage rate. If you plan to use actual car expenses for your tax deduction, you’ll need to keep receipts and documents related to your annual vehicle expenses (i.e., car repairs and insurance). We’ll talk more about standard mileage vs. actual car expenses later in this post.

Step 4: File The Correct Tax Forms

Keeping and maintaining good records makes it easier come tax time, but you’ll also need to ensure that you’re filing the proper tax forms with your return. Here’s a breakdown of what form you’ll need to use to claim your mileage deduction:

  • Self-Employed, Business Owners, & Rideshare Drivers: The mileage deduction is claimed on your Schedule C.
  • Reservists, Performance Artists, & Fee-Based Government Officials: Report your miles on Form 2106: Employee Business Expenses.
  • Volunteers: Qualified mileage will be included as part of your charitable deductions. This is only available for those who are claiming itemized deductions.
  • Medical Appointments: Qualified mileage will be included as part of your medical deductions. This is only available for those who are claiming itemized deductions.

Depending on the form you file, you may be required to include additional information about the vehicle used, such as the date it was put into service.

Step 5: Hold On To Your Records

After you file your return, you may be required to submit documentation to the IRS to verify your mileage. Because of this, you should hold on to your records for a minimum of three years. Make sure to separate your records, receipts, and other documentation for each tax year to stay organized.

If you find that your records are taking up too much space, you might want to consider scanning your documents, using accounting software with built-in mileage tracking, or using another computer-based form of storage for future tax years.

Should I Use The Actual Expenses Vehicle Deduction Method Instead?

There are two different vehicle deductions that you can choose to lower your tax liability: the standard mile deduction and the actual expenses method. You can only choose one, so it’s important that you make the right choice to get the most out of your deduction. Keep reading to learn more about these deductions and how you can determine which one is best for your business.

Actual Expenses VS Standard Mile Deduction

Standard Mileage Deduction Actual Car Expense Deduction
Calculated using the current standard mileage rate set by the IRS Calculated using the costs to operate the car for business use
Can’t write off vehicle expenses; must use standard rate per mile driven for business use Can write off expenses including gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation
Tracked using a mileage log Expenses tracked using receipts and other documentation
Must be used the first year the car is placed into service If chosen for the first year car is placed into service, it must be used every year following that the vehicle is in service

With the standard mileage deduction, you can deduct a set rate per mile when a vehicle is used for business purposes. This rate changes each year and is posted on the IRS website. You must own or lease the vehicle for which you are claiming the standard deduction. Mileage should be tracked using a mileage log.

The standard mile deduction is easy to calculate, which is why many taxpayers choose to use this option. However, in some cases, you may not be able to use the standard mile deduction. Per the IRS, you will be unable to use this option if any of the following apply:

  • Your business uses five or more cars at one time
  • You claimed a depreciation deduction for the car using any method other than straight-line
  • You claimed a Section 179 deduction on the car
  • You claimed the special depreciation allowance on the car
  • You claimed actual expenses after 1997 for a vehicle you lease

To use the standard method, you must use it the first year that your car is put into service for your business. In subsequent years, you can continue to use the standard mileage deduction, or you can switch to the actual expenses method.

If you choose to use the standard deduction for a leased vehicle, you must continue to use the standard deduction for the duration of your lease, including all renewals.

You may decide that the actual expense deduction is the better option for your business. Some business owners also don’t qualify to use the standard deduction (such as businesses with a fleet of vehicles), so they must use the actual expense deduction instead.

Instead of receiving a set rate for the miles driven, this deduction allows you to write off expenses necessary for the operation of a vehicle for business purposes. These include:

  • Gas
  • Oil
  • Repairs
  • Insurance
  • License fees
  • Registration fees
  • Vehicle depreciation

This method may require more recordkeeping, but it could potentially result in a higher deduction than using the standard mileage rate.

One important thing to note is that if you opt to use the actual expenses deduction, you will have to continue to use that method for each year that the vehicle is being used for your business.

If you’re unsure which method is best for you, use IRS tax form instructions or online calculators to determine which gives you the larger deduction.

How To Track The Actual Expenses Vehicle Deduction

If you decide to use the actual expenses vehicle deduction, you will need to track your vehicle expenses. If the vehicle is used for business and personal use, you will only be allowed to deduct expenses associated with the business usage of the vehicle.

You can use a mileage log to determine how often the vehicle is used for tax purposes. You will also need to hold onto any receipts and documents related to any vehicle expenses.

Additionally, you will want to hold onto receipts for parking and toll fees. These expenses could potentially be deductible elsewhere on your tax return. This applies even when you use the standard mileage deduction.

The Bottom Line On Claiming Mileage & Vehicle Tax Deductions

Whether you’re a full-time small business owner or you do freelancing work on the side, doing your taxes can be stressful. One way to ease some of that tax-time stress is by lowering your tax liability with credits and deductions, such as the standard or actual expenses mileage deductions. And don’t stop there. Get the most out of your tax return by checking out our complete list of small business tax deductions that can benefit your business.

Good luck!

Mileage Tax Deductions FAQs

Can I write off my mileage in 2021?

If you meet the conditions set by the IRS and have used a vehicle for business purposes, you can write off your mileage in 2021. Small business owners, rideshare drivers, independent contractors, gig workers, and other self-employed individuals may qualify for this money-saving deduction. The current standard rate for the 2021 mileage tax deduction is $0.56 per mile.

Is it worth claiming mileage on taxes?

While claiming mileage on your taxes does require a bit more recordkeeping, you could potentially shave hundreds of dollars (or even more) off of your tax liability. Apps and software make it easier than ever to track your mileage, save receipts, and keep track of your mileage so that you’ll be prepared come tax time.

Should I use the mileage deduction or standard vehicle deduction?

The mileage deduction and standard vehicle deduction are interchangeable terms. This is one type of deduction you can claim on your tax return, or you can opt to use the actual expenses deduction. There are different requirements for each, so make sure you qualify. If you qualify for both options, try calculating the deduction using each method to see which results in the larger deduction.

How do I track mileage for deductions?

Many business owners use a traditional driving log to track mileage, including information such as the odometer readings and the purpose of the trip. Other business owners opt to use apps and software to track mileage for one or more business vehicles.

What other deductions can I claim on my small business taxes?

There are a number of deductions you can claim on your small business taxes, including home office expenses, rent, utilities, travel expenses, software, supplies, payroll expenses, and more. Check out our complete guide to small business tax deductions to learn how you can save this tax season.

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The Best Merchant Accounts For Collection Agencies & Debt Collectors https://www.merchantmaverick.com/debt-collection-agency-merchant-account/ https://www.merchantmaverick.com/debt-collection-agency-merchant-account/#respond Tue, 04 Jan 2022 20:54:53 +0000 https://www.merchantmaverick.com/?p=134534 To start a collection agency, you'll need a robust suite of hardware and services to accept payments online and over the phone. Whether you're building your agency from the ground up or already have a business that needs to switch to a better merchant account provider, your agency's success depends on multi-channel payment support, systems to combat fraudulent chargebacks, and transparent pricing plans and contractual requirements.

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Do you feel like it’s the right time to start your own collections agency? You’ll need a robust suite to accept payments online and over the phone, if so. Whether you’re building your agency from the ground up or already have a business that needs to switch to a better merchant account provider, your agency’s success depends on multi-channel payment support.

The debt collection industry is a high-risk one, which means that business owners who want to start a collections agency may face some hurdles when looking for a merchant account that’s right for them. There are a few risk factors and legal issues that come into play when looking for the proper payment support for your agency. So, let’s take a look at the best merchant accounts for collection agencies and debt collectors and learn how to navigate the process of choosing a provider smoothly and with minimal frustration.

Why Is Credit Card Processing For Collection Agencies Considered High Risk?

 

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The 10 Best States For Women-Led Startups In 2022 https://www.merchantmaverick.com/best-states-for-women-led-startups-2022/ https://www.merchantmaverick.com/best-states-for-women-led-startups-2022/#respond Tue, 04 Jan 2022 15:00:48 +0000 https://www.merchantmaverick.com/?p=131712 The 10 best states for women-led startups, led by Colorado, shine when it comes to metrics of gender parity, cost of living, and tax rates. What's more, investors in these states are finally giving a fair shake to women-owned startups. Despite COVID, 2021 was a record-shattering year as female-only founded startups across the nation collected $5.6 billion, up an astounding $2 billion from the previous record set in 2019

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Investors are finally giving a fair shake to women-owned startups — at least according to the latest data report from Merchant Maverick. Despite COVID, 2021 was a record-shattering year as female-only founded startups across the nation collected $5.6 billion, up an astounding $2 billion from the previous record set in 2019 (per data from PitchBook). This positive change has been felt in many areas of the country, not just in Silicon Valley, and has featured heavily in the rise of many upward-trending states on our top 10 list, such as Florida, Texas, and newcomer Arizona, which all saw impressive venture capital growth compared to our study last year. Thanks to rising startup hubs in cities like Miami, Boulder, Phoenix, and Houston, more funding opportunities are available to female entrepreneurs than ever before.

To accurately gauge the best states for women-led startups, we considered an array of gender-specific metrics:

  • Total venture capital in the past five years invested into women-led startups
  • Percent of employer firms led by women 
  • Percent of employees at women-led firms 
  • Percent of women self-employed in their own business 
  • Average income of women self-employed in their own business 

We also included several general economic indicators, including each state’s startup early survival, income, and unemployment rates.

Despite a general trend of increased backing to women-owned startups across most parts of the nation, it’s not all good news. Our study shows that the Midwest fails in nearly every metric examined. And it’s not a close race. The highest-ranked midwestern state, Minnesota, snatches a paltry 19th place, while other center-west states like Iowa and North and South Dakota come almost last in the nation. The American heartland trails the rest of the nation in average income for women-owned businesses, number of workers employed at women-owned businesses, and many other aspects of gender parity. But where this region really fails female startups is in investment dollars. Venture capital investment into women-owned startups in the Midwest is virtually nonexistent.

Key Findings

  • There has been a dramatic increase in venture capital funding allotted to female-led startups, allowing more startups to form and ultimately succeed. Despite the general economic slump triggered by continuing COVID restrictions, 2021 was a record-shattering year for female-only founded startups, which collected $5.6 billion in venture capital funding through October.
  • Startups in No. 2 Texas especially benefited from the upward trend in venture capital investments. The state’s five-year total for female-focused venture capital investments grew from $365 million in our report from last year to $814 million this year — a growth spurt that helps explain why the Lone Star State earns 2nd place this year in our state-based rankings.
  • Last year’s No. 1 Colorado retained its top position, boasting great employment numbers and the continuing growth of startup hubs in Boulder and Denver.
  • Top 10 newcomer Arizona’s rise can be attributed in part to the burgeoning startup scene in Phoenix, viewed by many as a more cost-effective and regulation-light alternative to Silicon Valley.
  • The Midwest is completely absent from the top 10, indicating widespread failure to draw investment dollars, encourage female entrepreneurship, and cultivate the success of new businesses.

The Top 10 States For Women-Led Startups In 2022


1. Colorado

Overall score: 75.2

Last year's rank (change): 1st (0)


Colorado easily maintained its top spot from last year, despite changes to the economic landscape that caused a shift in the rest of the top 10. Most notably, Colorado is the only state to rank in the top 10 for all five gender-specific metrics we measured — a slight improvement even over last year. The Centennial State shines brightest when it comes to the percentage of women who own their own businesses — 2.37% of all women in Colorado are self-employed in their own incorporated business, a fact which ranks the state 2nd only to Montana. In addition, women helm 29.2% of employer firms in the state.

2. Texas

Overall score: 64.3

Last year's rank (change): 6th (+4)


Climbing the ranks to No. 2 is the Lone Star State. Texas, which is also among the fastest-growing states, has cultivated a business-friendly reputation that appears to be attracting a high volume of women-led organizations and startups. Major tech hubs in Austin and Dallas have made Texas a great place for venture capital, with women-led startups pulling in $814 million in VC funding in the last five years. The state doesn’t do as well when it comes to average income metrics, but with a 0% state income tax, women business owners can expect an average $62,945 yearly income to go farther in Texas than it would in most other states.

3. Florida

Overall score: 63.9

Last year's rank (change): 4th (+1)


Florida bumped up one spot from 4th last year, thanks largely to the fact that 2.26% of all women in the state run their own business (4th overall). Women-led startups have also pulled in $286 million in venture capital over the past five years. The Sunshine State’s lack of an income tax is quite helpful as well. The startup potential here is obvious as companies look beyond Silicon Valley — for instance, investors have tapped the sunny shores of Miami as fertile ground for startups shedding the office building lifestyle.

4. Washington

Overall score: 63.8

Last year's rank (change): 2nd (-2)


While it’s taken a modest tumble from 2nd to 4th place, Washington is still a great place for women-led businesses, which account for nearly a third (29.9%) of all firms within the state, up from 28.2% last year. The self-employment rate for women also rose from 1.66% to 1.91%. The Evergreen State’s I-5 corridor remains one of the biggest tech hubs on the West Coast outside of Silicon Valley, which helped women-led startups nab $481 million in venture capital funding over the past five years. If there’s a Cascades-sized shadow here, however, it’s the relatively high rate of failure for startups. Washington finished dead last in startup survivability.

5. Maryland

Overall score: 60.0

Last year's rank (change): 12th (+7)


Maryland, which recently launched a startup-focused tax credit, cracks the top 10 after sitting just outside last year in 12th. The state does especially well in how much money women business owners earn — they rake in $81,839 per year (2nd overall in the nation). 22.6% of employees in the state are at women-led firms, which ranks 4th. This Mid-Atlantic state also does well in the percentage of employer firms led by women at 27.5% (10th nationally). However, fledgling startups can struggle here as Maryland’s 76.7% startup early survival rate sits in a lowly 39th position.

6. Montana

Overall score: 59.5

Last year's rank (change): 5th (-1)


Montana challenges many perceptions of what constitutes a woman-friendly business environment. While venture capital is scarce there, the women of Montana are the most likely (2.42%) in the nation to own their own business. Not only that, but a sizable portion of Montana’s workforce (22.2%) works at a women-led business. Montana is held back a bit by the average income of business owners, which ranks among the lowest in the nation. Some of this is mitigated by Big Sky Country’s relatively low cost of living, but its higher-than-average upper income tax rate can cut into take-home pay. Startups that take root in Montana stand an 81% chance of going the distance, the 3rd-highest success rate in the nation.

t7. Massachusetts

Overall score: 58.7

Last year's rank (change): 20th (+13)


It’s no surprise to see Massachusetts jump 13 spots to No. 7 as the state’s educational prowess has long powered the local startup scene. For our rankings, Massachusetts is part of the exclusive $1 billion club alongside California and New York as the only three states to have garnered over $1 billion in venture capital funding for women-led startups in the past five years. Women business owners also earn over $97K per year here, by far the highest average in the country. However, the Bay State struggles in the other three gender-specific categories we measured — Massachusetts ranks in the 30s for all three metrics.

t7. California

Overall score: 58.7

Last year's rank (change): 9th (+2)


California crept up two spots this year on the strength of its startup culture and infrastructure. As you might expect from the home of Silicon Valley, the $6.7 billion in venture capital dispensed to women-led startups in California over the last five years rivals that of other nations, not just other states. Relatedly, California also boasts the highest first-year survival rate in the country for startups at 81.8%. This productive environment comes at a cost — a high unemployment rate and the highest taxes in the nation. However, with an average income of $77,147 — almost twice that of Montana — women business owners may find the price entry to be worth it.

9. Arizona

Overall score: 58.4

Last year's rank (change): 13th (+4)


The home of the Grand Canyon cracked the top 10 as the third and final newcomer. Arizona’s success in our rankings is thanks mainly to the fact that women lead 28% of employer firms in the state (9th overall). In addition, Arizona women business owners earn just north of $70K per year, which ranks a solid 10th overall. Where Arizona really excels is consistency — the state ranks no worse than 20th in any of the five gender-specific metrics. These numbers back up the state’s maturing startup scene where Phoenix has already been marked by some as a cheaper and regulation-light alternative to Silicon Valley.

10. Virginia

Overall score: 57.7

Last year's rank (change): 3rd (-7)


Narrowly holding on to the top 10 after falling seven places from last year is Virginia. The big reason for the drop doesn’t have anything to do with women — the percentage of Virginia businesses run by women increased from 27% to 28.7% from 2020 to 2021. Where Virginia really declined is in its startup first-year survival rate, dropping from 90.5% to 76.2%. Otherwise, Virginia’s metrics tend to fall on the high side of average without any serious weaknesses.

The Worst 10 States For Women-Led Startups In 2022


41. Tennessee (40.4 overall score): Women run only 15% of Tennessee’s employer firms (48th nationally) and just 1.15% of women in the state run their own business (46th nationally).

42. South Dakota (38.6): While it has low taxes and unemployment, South Dakota lags when it comes to women in leadership positions (20%).

43. Arkansas (35.6): With just 15.8% of employer firms in the state run by women (46th overall), Arkansas finds itself squarely in the bottom 10.

44. Alabama (34.9): Despite low unemployment and taxes, Alabama lands in the lower half of states for most of our metrics, with particularly low rates of business ownership for women (1.24%) and average women-run business income ($47,878).

45. New Hampshire (34.8): The Granite State ranks dead last in percentage of employer firms led by women (19.9%) and second-from-last percentage of women who own their own business (1.12%).

46. Utah (34.1): Utah may be the fastest-growing state in the nation, but it’s not currently translating into gains for women-led businesses. The Beehive State is dead last in firms run by women (13.5%) and average income for women business owners ($37,190).

47. North Dakota (31.2): Just $14K in venture capital has been invested into women-led startups in the past five years, while North Dakota’s percentage of employer firms led by women sits at a paltry 20.1% (both numbers rank 48th).

48. West Virginia (28.7): West Virginia ranks poorly in most of our metrics, but particularly so when it comes to employer firms led by women (21.4%) and women who own their own businesses (1.12%).

49. Iowa (26.2): Only 15.3% of employees in the state are at women-led firms (47th nationally), while Iowa is one of two states not to have received any venture capital funding in the past five years.

50. Mississippi (25.3): Mississippi once again brings up the bottom of our list, lagging again in firms led by women (13.7%) and average income of women business owners ($39,912). Additionally, Mississippi women received $0 in venture capital funding within the past five years.

Raw Data


Map View Of All 50 States

Complete Ranking Of All 50 States

Methodology

For this report, we gathered data from eight separate metrics for all 50 US states. The data for each metric was normalized from 0-100 so that the highest-ranked state within a given metric had a score of 100 and the lowest-ranked state had a score of 0. These normalized scores were then multiplied by specific weights to achieve the overall score for each state.

Below are the eight metrics we chose, along with the percentage used to calculate each weight:

  • Percent of employer firms led by women (15%): This metric compares the number of employer firms led solely by women to the number of employer firms led by men in the state, per data from the Census Bureau’s 2020 Annual Business Survey. It provides a very basic look at the level of gender parity in each state.
  • Percent of employees at women-led firms (15%): This metric compares the number of employees at women-led employers firms to the number of employees at male-led firms in the state, per data from the Census Bureau’s 2020 Annual Business Survey. It provides another sample to estimate gender parity, as well as the economic strength of women-led firms on a state-by-state basis.
  • Percent of women who own their own business (15%): This metric compares the number of women self-employed in their own business to the total number of women in the state, per the US Census Bureau’s 2020 American Community Survey. It gauges how actively women engage in entrepreneurial roles within each state.
  • Average income of women business owners (15%): This is simply the average yearly income for self-employed women business owners, per the US Census Bureau’s 2020 American Community Survey. It provides a glimpse at the earning potential a woman entrepreneur might have state-from-state.
  • Venture capital invested into women-led startups (15%): For this metric, data from PitchBook’s US VC Female Founders Dashboard was recorded to calculate the amount of capital invested into venture-backed startups led solely by women within each state. Data over a five-year period from 2017 through October 2021 was included.
  • Percent of startups still active after one year (10%): Also known as startup early survival rate, this metric measures the immediate survival of startups and uses data from the 2020 edition of the Kauffman Indicators of Entrepreneurship. Early survival rate doesn’t gauge the long-term health of startups, but it gives key insights into the success rate of young startups on a state-by-state basis.
  • State income tax rates (7.5%): Each state’s highest income tax bracket for 2021 was tallied, with lower tax rates being considered better. States with lower income tax rates can provide entrepreneurs greater earning potential.
  • Unemployment rates (7.5%): These rates were pulled from the Bureau of Labor Statistic’s October 2021 update. For the purposes of this report, unemployment rates are used as a snapshot to gauge the economic health of each state.

Our data was pulled from six separate sources, including the US Census Bureau’s 2020 Annual Business Survey, the US Census Bureau’s 2020 American Community Survey, PitchBook’s US VC Female Founders Dashboard, the Kauffman Indicators of Entrepreneurship, Tax-Rates.org, and the US Bureau of Labor Statistics.

Chris Motola contributed to this report.

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Casa Miranda: An Eco-Tourism Approach To Short-Term Rentals https://www.merchantmaverick.com/casa-miranda/ https://www.merchantmaverick.com/casa-miranda/#respond Fri, 17 Dec 2021 17:08:18 +0000 https://www.merchantmaverick.com/?p=133425 Lauren and Ronn Grewber turned their sustainability passion project into a thriving short-term rental business in North Park, San Diego.

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Casa Miranda owners

The husband-and-wife team behind Casa Miranda, Lauren and Ronn Grewber.

Lauren Grewber has always liked to name things.

Her old Prius was Donnie, and her 2015 all-electric Leaf is Lizzie. And as you might surmise from her vehicle choices, Lauren is also really into environmentally friendly living, as is her husband Ronn.

This is also evidenced in the various environmental DIY projects going on at the Grewbers’ at any given time, which include (but are by no means limited to) a rainwater collection system to irrigate the many edible and drought-tolerant plants that adorn the property, and series of composting bins.

“When you look at people’s energy usage, a lot of it is just transportation, going from one place to another, so cars are big,” says Lauren. “But a big part of that too is just the way and where buildings are constructed and people’s living environments. For example, the amount of AC and heat you use takes a huge environmental toll.” 

Being as mindful of the environment as the importance of a good name, Lauren and Ronn knew they wanted their new short-term rental (STR) duplex they started building in 2020 to have some sustainable, yet affordable, eco-design technologies.

They also, of course, wanted their new business to have a fitting name. The husband-and-wife business owners finally settled on “Miranda,” to match the other “M” names of buildings on their property lot: Magpie Oak, the front house where Lauren and Ronn reside, and Maggie, the eco-friendly tiny home they previously constructed on the lot (and currently rent out to long-term tenants).

But Casa Miranda is much more than just a pandemic passion project or an amalgamation of all the things the Grewbers love—it’s also a thriving business, located in North Park, San Diego, a historic and highly walkable neighborhood with a diverse mix of century-old homes, luxury condos, eclectic boutiques, and some of the top-rated craft breweries in California.

Since Casa Miranda’s grand opening a few months ago, the gorgeous and smartly designed units have rarely had a vacant night—and they have been consistently booked every single weekend. This impressively designed duplex was also featured in San Diego’s 11th annual Green Homes Tour in October 2021.

I recently sat down to talk with Lauren about Casa Miranda, and also got a primer on sustainable construction methods, eco-tourism, and the pros and cons of short-term rentals.

eco-friendly airbnb

Casa Miranda image courtesy of AirBnB.

Next-Level Eco-Design

casa miranda under construction

Casa Miranda under construction. Image courtesy of Instagram. (@CasaMiranDiego)

Casa Miranda has a dazzling number of eco-features, in terms of its structure and design, as well as its heating and cooling systems. These features not only minimize the environmental impact of the units, but also save costs over time, and can even provide certain health benefits to guests during their stay. Lauren and Ronn worked with the San Diego architect WORKSHOP B to construct Miranda with these and other green construction methods:

Advanced framing: This construction method, which spaces the studs farther apart, includes more space for insulation and has less thermal bridging because there are fewer pieces of wood. (The Grewbers had to hire a special engineer who was familiar with this technique.)

ZIP System® R-sheathing: An alternative type of structural sheathing that includes wood, a layer of insulation, and a mechanically sealed air and water barrier, giving the structure a very high level of insulation.

Heat recovery ventilation (HRV): This passive fresh air ventilation system preserves indoor warmth or cool air. HRV provides a constant stream of filtered outside air while also removing stale indoor air.

Heat pump technology: This technology, used for Miranda’s drier, water heater, and mini-splits, uses far less energy than standard heating and cooling methods. The technology takes the heat from the air, condenses it, and brings that heat into the clothes in the case of the drier, or into the water of the water heater. 

The two units are also powered entirely by solar energy (no gas) and use so little energy that the Grewbers only have to pay a grand total of $11/month for Casa Miranda’s electric bill—the minimum monthly payment required by the utility company.

I asked Lauren whether they advertise these eco-design qualities to guests, and she said that while it can be difficult to know which features guests will care about, of all Casa Miranda’s eco-design features, a lot of guests really like the HRV system:

So the HRV system is basically a constant stream of air being filtered through a MERV-13 filter and brought into the house. At the same time, stale air is being sucked out of the house. So the air in there is super fresh, super filtered, so people who might have allergies or things like that experience a much higher quality of air.”

The Great AirBnb Debate

eco friendly building balcony

Casa Miranda image courtesy of AirBnb.

STR regulations are currently a hot topic in San Diego (among other cities). Many homeowners want the city to crack down on the number of AirBnb, VRBOs, and other short-term vacation rentals, claiming these residentially zoned structures do more harm to the community than good, particularly when they eat up the already-tight rental housing supply, or when irresponsible owners let their property become party central in an otherwise quiet residential neighborhood.

Currently, STRs in the city of San Diego are largely unregulated, but Mayor Todd Gloria recently signed into law a new city-wide short-term rental ordinance that will eventually cap the number of STRs to 1% of the housing supply. The new legislation also will also require STR hosts to apply for and pay for a license with the city.

Despite being an AirBnb host, Lauren says she’s generally in favor of these regulations.

“I think the new regulations are actually a good thing. When things are unregulated, bad things happen. There are a lot of really good AirBnb hosts who try really hard to make sure their rentals are not party houses, and they’re respectful of the neighborhood. And then there are places that don’t give a crap, and they don’t mind that they’re a party house—those places are bad for the community. So regulation may help get rid of those bad actors.”

Lauren likes the dynamic of living on the same property as her business since she and Ronn are able to stop any bad guest behavior in its tracks. “We had one night where someone had a little party with two or three other guests, but we shut it down right away. People are less likely to be up to no good when they know that the owner is nearby.”

When it comes to the net impact of STRs on the community, Lauren pointed out the benefits of bringing foot traffic to small businesses in her neighborhood, which is located in an area with no nearby hotels. “My opinion is that STR can add a value. The people who stay at these AirBnbs go out to breakfast, lunch, and dinner and shop in this neighborhood. So we’re bringing people to all these small businesses in this neighborhood.”

“I understand it does change the feel of the neighborhood if the whole neighborhood is all AirBnbs; then that would be a completely different feel. So there is a balance and I think there is an importance to capping it and an importance to regulating it.”

Lauren also said it was important to her and Ronn that they build brand-new STR units (on their own residential lot), so that they would not remove any long-term housing from the super-tight San Diego housing market.

What’s Next For Casa Miranda?

Eco-design features

Sustainable design: A passion fruit trellis watered by a rainwater collection system.

In the immediate future, the Grewbers plan to continue making minor design improvements to Casa Miranda, including interior design upgrades from interior peace , a company run by a friend who creates art from recycled materials. For their software needs, the Grewbers will continue to use AirBnb with Wheelhouse pricing software, though eventually, they would like to create their own booking website for Casa Miranda. (I made a mental note to recommend some website builders to help her with that endeavor.)

Further down the road, the Grewbers hope to expand their eco-tourism vision to a larger property, perhaps in a commercially zoned setting or maybe somewhere more rural.

“I do like the idea of eco-tourism and it’s a dream of ours to own a larger property, have a main house on there, and then have little structures that are built in a very eco-friendly way, maybe with little casitas on this property that exhibit different eco features. For example, some using different types of siding or straw bale houses. And I think that would be a really cool experience for eco-tourism.”

The Grewbers will always have plenty of smaller projects to keep them busy on the homefront—as I interviewed Lauren on Miranda’s top-unit balcony, Ronn was preparing to install some floating shelves inside and while also gearing up to repaint Maggie during a short vacancy between long-term tenants.

“We’re very DIY so we enjoy doing things ourselves,” explained Lauren. “I mean, we hire builders and people to do certain fixes, but we do a lot of things and we’re very hands-on. We’re always doing something. So I think it’s like an outlet for certain kinds of creativity.”

The Grewbers will take a rare vacation in January, perhaps to a cabin in the woods, to regroup and turn inward, with the sole goal of contemplating and deciding on their next project. Where will they travel to? “Somewhere where there’s no work to do,” says Lauren.

—————

To book your stay at this modern STR in the heart of one of the hippest neighborhoods of San Diego, you can find Casa Miranda on AirBnb

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https://www.merchantmaverick.com/casa-miranda/feed/ 0 Casa Miranda casa miranda eco tourism casa miranda eco-building eco friendly building balcony Eco-design features In the shared grounds we have blueberries, passion fruit (pictured here), pomegranates, lemon, pineapple guava, basil, rosemary, mint, oregano, and chives. If it's fruiting, you're welcome to share in our abundance.
The Best Business Bank Accounts for Small Businesses https://www.merchantmaverick.com/best-business-bank-account/ https://www.merchantmaverick.com/best-business-bank-account/#respond Thu, 16 Dec 2021 22:01:51 +0000 https://www.merchantmaverick.com/?p=132879 There is a wide array of banks and financial services companies eager to take you on as a customer. But how can you tell which offers are legitimate, let alone find the best bank for small business? We'll walk you through the fees you can expect to pay, what kind of customer support you can expect, and more, so you can compare the best business bank accounts available and choose the one that will work best for you.

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Intro:

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How Are Bonuses Taxed? https://www.merchantmaverick.com/how-are-year-end-bonuses-taxed/ https://www.merchantmaverick.com/how-are-year-end-bonuses-taxed/#respond Thu, 16 Dec 2021 17:48:59 +0000 https://www.merchantmaverick.com/?p=133570 Are you a small business owner that’s rewarding your employees with a bonus? You will need to decide how much to give, when to distribute the bonus, and calculate how much taxes to withhold (spoiler alert: tax calculations for bonuses are different from regular wages). Or maybe you’re an employee receiving a bonus for your […]

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Are you a small business owner that’s rewarding your employees with a bonus? You will need to decide how much to give, when to distribute the bonus, and calculate how much taxes to withhold (spoiler alert: tax calculations for bonuses are different from regular wages).

Or maybe you’re an employee receiving a bonus for your hard work, and you want to know the tax implications of receiving this supplemental income.

No matter which situation you’re facing, we’re here to help. In this guide, we’re going to break down everything you need to know about bonuses and taxes. We’ll walk you step-by-step through how to tax bonuses, calculate withholdings, how to offset your tax liability as an employee, and how to handle taxes on bonuses if you’re self-employed.

Keep reading to learn more!

How Are Bonuses Taxed For Employers?

There are two primary methods for calculating federal income taxes on bonus payments for your employees.

The Percentage Method For Calculating Bonus Taxes

The percentage method is the easiest way to calculate bonus taxes. Using this method, you withhold a flat income tax rate of 22% from the bonus amount. No other percentages can be used. This tax rate applies only to bonuses or other supplemental income. If regular wages are also paid at the same time, the flat rate of 22% only applies to the bonus.

Let’s look at an example. Your employee, John, will receive a $2,000 bonus, and you decide to use the percentage method.

  1. Multiply the bonus amount ($2,000) by 22% (.22). The total is $440. This is the amount of taxes you will withhold from the bonus.
  2. Subtract the amount withheld ($440) from the gross bonus amount ($2,000). This leaves you with $1,560. This is the amount that John nets after taxes are withheld.

One last thing to note is that the 22% tax rate applies to supplemental pay (including bonuses) up to $1 million. Bonuses or supplemental income exceeding $1 million is taxed at a 37% rate. For most small businesses, though, this won’t be a concern.

The Aggregate Method For Calculating Bonus Taxes

The aggregate method for calculating bonus taxes is a little more complex. Using this method, you will use both the amount of the bonus and the employee’s regular wages to perform your calculations. Let’s break down how this works.

  1. Add the employee’s bonus to regular wages that are paid at the same time.
  2. Use this total to find the amount to withhold using the tax brackets in IRS Publication 15. (Write down this number — you’re going to need it later.)
  3. Next, use the tax brackets to determine how much to withhold ONLY on the employee’s regular wages.
  4. Subtract the taxes from regular wages in step 3 from the aggregated total of bonus and regular wages from step 2. This is the amount that you will withhold from the bonus payment.

While it sounds confusing, let’s clear up any questions with an example.

Your employee, John, makes regular wages of $1,000. According to his W-4, he is single, has just one job, and doesn’t have any dependents. John will receive a year-end bonus of $2,000. To calculate the amount of federal taxes to withhold, take the following steps:

  1. Add John’s bonus amount ($2,000) to his regular wages ($1,000). The sum is $3,000.
  2. Use IRS Publication 15 to find the amount of taxes to withhold from $3,000. Based on the data from John’s W-4, this amount is $393.
  3. Use IRS Publication 15 to find the amount of taxes to withhold from John’s regular wages ($1,000). Based on the data from John’s W-4, this amount is $54.
  4. Subtract the total from step 3 ($54) from the total in step 2 ($393). The total is $339. You will withhold this amount from John’s bonus check of $2,000.

In addition to federal income taxes, you will also need to withhold Social Security, Medicare, and state taxes from your employee’s bonus.

Which Bonus Tax Method Should You Use?

Now, it’s time to decide which bonus tax method you’ll use. While it may seem logical to use the percentage method because it’s easier, there are a few exceptions to note.

According to the IRS, you can choose from either method if you withheld income tax from the employee’s regular wages during the current or immediately preceding calendar year. If income tax was not withheld from the employee’s regular wages during that time period, you will have to use the aggregated method for calculating taxes withheld on bonuses.

While the percentage method is easier, it may result in the employee receiving less money upfront than if you had used the aggregated method. On the other hand, this also helps the employee avoid underpaying on taxes and having to make a bigger payment come tax time. Any tax overages paid in by the employee will be available as a tax refund after they file their income tax returns.

How Are Bonuses Taxed For Employees?

Fortunately for employees, the hardest work when it comes to taxation on bonuses is left up to the employer. However, it is important to keep in mind that bonuses are taxed at a higher rate than regular wages. Under IRS rules, bonuses are considered supplemental income, which is defined as wages that are paid to an employee that aren’t regular wages. Supplemental income includes bonuses, tips, commissions, overtime pay, accumulated sick pay, severance pay, awards, and prizes. Your employer will calculate the taxes on your bonus using one of the two methods described earlier in this post.

The 2021 Year-End Bonus Tax Rate

The federal withholding rate for supplemental wages in 2021 is 22%. Supplemental wages include bonuses, commissions, tips, overtime pay, accumulated sick leave, awards, and prizes.

Can You Avoid Bonus Taxes?

Unfortunately, there’s no way to avoid bonus taxes. IRS rules require you to pay taxes on any type of supplemental wages, including bonuses.

However, if you are worried about how your bonus will affect your tax return, there are a number of ways that you can lower your tax liability. To lower your tax liability, you must reduce your amount of taxable income. Some ways that you can do this include:

  • Contribute or increase contributions to an employer-sponsored 401(k) or 403(b) plan
  • Contribute or increase contributions to individually-held IRAs
  • Itemize charitable contributions

You can also find savings by working with a tax professional or by using tax software, which makes it easy to find deductions and tax credits that can help lower your tax liability.

How Do You Report A Bonus On Your Tax Return?

Reporting a bonus on your tax return is simple. The W-2 you receive from your employer at the beginning of the year will include your bonus as part of your wages. This amount will then be reported on line 1 of your Form 1040 when filing your tax return.

What If You Are Self-Employed?

If you’re self-employed and received a bonus, things work a little bit differently. Since you aren’t an employee, you won’t receive a W-9. Instead, your bonus (along with any other income) will be reported on your 1099-MISC in Box 7. Your income (which includes any bonus you received) will be subject to self-employment and income taxes.

Year-End Bonus Tax FAQs

How are year-end bonuses taxed?

Year-end bonuses are taxed as supplemental income, which means that bonuses are taxed at a higher rate than regular wages. Additionally, Social Security and Medicare taxes are also taken from bonuses.

What is the 2021 bonus tax rate?

The 2021 bonus tax rate is 22%.

Will my bonus make my taxes higher?

Your bonus and other supplemental wages (such as tips and commissions) will increase your taxable income and could potentially increase your tax liability. However, you can lower your taxable income (and your tax liability) by taking steps like contributing to a retirement plan or deducting charitable contributions.

Is the percentage method or aggregate method better for bonus taxes?

The percentage method for bonus taxes is the easiest for employers, but it can result in a lower upfront payment for employees. If your employee hasn’t been taxed on wages in the current year or previous year, you won’t be able to use the percentage method and will have to use the aggregate method.

Does Merchant Maverick offer a bonus tax calculator?

Merchant Maverick does not offer a bonus tax calculator. However, you can use the information in this post to calculate bonus taxes. Additionally, we are always updating our content to best serve our readers, so if you’d like to see a bonus tax calculator in the future, comment down below!

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